Best Canadian Mortgage Rates
Fixed Rates or Variable Rates?



"How can I choose the best Canadian mortgage rates when I compare a variable rates mortgage to a fixed rate mortgage?" I hear this question all the time!

The first strategy is to understand the differences between the fixed rate and the variable rate. Next, let's review some examples from recent history to compare & contrast...

Best Mortgage Rates Canada

Fixed Rate Mortgage

A fixed rate mortgage is a contract that is signed between the lender and borrower where the interest rate is fixed for a certain period of time.

For Example, the borrower could choose a 5 year closed fixed term at an interest rate of 4%. This means that the mortgage rate will stay at 4% for 5 years. At the end of the 5 years, the borrower would negotiate with the lender again for another term.

There are a couple of things to keep in mind when choosing a fixed rate:

  • the interest rate will be the same for the full length of the term
  • the payment will be the same for the length of the term
  • if the contract is broken early, then you would pay a penalty that is the greater of (IRD) Interest Rate Differential or 3 months interest
  • IRD is can very expensive if the current rates are low (at the time of breaking the contract)
  • qualifying is generally based on the rate you are receiving, unless you choose a term shorter than 5 years
  • Choosing a fixed rate is like choosing a GIC or Bond (guaranteed return)

Basically, choosing a fixed rate will make it easier to qualify for the mortgage. You will also avoid any risk of interest rates going up. You will not benefit if interest rates go down over the term you choose.

Historically, shorter term mortgages & variable rate mortgage are priced lower at any given time compared to the longer term mortgages. That said, if you are uncertain about increases to rates or your ability to afford increased payments, then the best Canadian mortgage rates for you is a fixed rate.

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Variable Rate Mortgage

A variable rate mortgage is a contract that is signed between the lender and borrower where the interest rate is set as a discount or premium to the prime lending rate. Over the term, the rate will move up and down based on changes in prime.

For Example, A borrower could choose a 5 year closed variable rate at a contract rate of prime minus 0.50%. If the prime rate is 5%, then the borrower's rate is 4.5%. If the prime rate is 4%, then the borrower's rate is 3.5%. The interest rate that the borrower pays is only known at the beginning of the contract. The rate can change monthly until the end of the contract.

There are a couple of things to keep in mind when choosing a variable rate:

  • the interest rate will fluctuate up or down over the full length of the term
  • the payment will fluctuate up or down over the length of the term
  • if the contract is broken early, then you will pay a penalty of 3 months interest
  • qualifying is almost always based on a higher rate than you will first receive
  • Choosing a variable rate is like choosing a Mutual Fund (potential chance for a bigger return or loss)

Basically, by choosing a variable rate mortage you will qualify for a slightly smaller mortgage amount than if you choose a 5 year (or longer) fixed rate mortgage.

By choosing the variable rate, you will generally start with a rate lower than if you chose a fixed. You also have the opportunity to have a lower rate over the full length of the term.

With the variable there is risk: the interest rate could increase higher than the rate that was available for the equivalent fixed term.

It's important to review your risk before you decide which is the best Canadian Mortgage rates for you.

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Compare Fixed & Variable from August 2011 and December 2011

In August of 2011, the best 5 year fixed rate available was around 3.49% and the 5 year closed variable rate was at prime minus 0.85% (prime was a 3.0%, therefore the variable was at 2.15%).

The difference is 1.35% and if the prime rate increased by 0.45% per year over the 5 year period, then you would basically break even. If the rates increased at a faster pace then choosing the fixed rate is better. If the rates increased at a slower rate then the variable would be better.

Deciding to choose between the best Canadian mortgage rates if fixed or variable would depend on what might happen in the future to the prime lending rate.

By reducing the amortization of the mortgage, i.e. choose an amortization less than 20 years, then you reduce the risks associated with the variable mortgage.

In December 2011, only 4 months later, the best 5 year fixed rate available was around 3.19% and the 5 year closed variable rate was at prime plus 0.10% (prime was still at 3.0%, therefore the variable was at 3.10%.

The difference between the 5 year closed fixed and variable rates is only 0.09%. In this case, the variable mortgage is not one of the best Canadian mortgage rates (in the long run).

There is such a small difference between the fixed and variable and a much higher risk associated with the variable. The fixed is the best choice!

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